Sunday, September 13, 2015

"Arbitrage: Historical Perspectives"

This is a repost from 2012.
An interesting survey by Simon Fraser University Professor Geoffrey Poitras

ABSTRACT

This article discusses the history of arbitrage from ancient times until
the beginning of the twentieth century. Opportunities for arbitrage
trading in ancient times are related to the movement of goods over
distance. The key role of the bill of exchange in arbitrage trading
during the Middle Ages is identified and the connection to ‘arbitration
of exchange’ discussed. A 17th century arbitrage involving the gold and
bill of exchange markets is detailed. As reflected in merchant manuals
of that period, the connection between riskless arbitrage trading and
the method of conducting arbitration of exchange in the 18th and 19th
centuries is detailed. An overview of 19th century arbitrage trading in
securities and commodities is also provided. The article concludes with
an examination of the etymology and historical usage of the word
‘arbitrage’ and the associated ‘arbitration of exchange’.

...Arbitrage in Ancient Times
Records about business practices
in antiquity are scarce and incomplete. Available evidence is primarily
from the Middle East and suggests that mercantile trade in ancient
markets was extensive and provided a number of avenues for risky
arbitrage. Potential opportunities were tempered by: the lack of
liquidity in markets; the difficulties of obtaining information and
moving goods over distances; and, inherent political and economic risks.
Trading institutions and available securities were relatively simple.
Circa 1760 BC, the Code of Hammurabi dealt extensively with matters of
trade and finance. Sumerian cuneiform tablets from that era indicate a
rudimentary form of bill of exchange transaction was in use where a
payment (disbursement) would be made in one location in the local unit
of account, e.g., barley, in exchange for disbursement (payment) at a
later date in another location of an agreed upon amount of that local
currency, e.g., lead [20]. The date was typically determined by the
accepted transport time between the locations. Two weeks to a month was a
commonly observed time between the payment and repayment. The specific
payment location was often a temple....MUCH MORE (24 page PDF)